Prior to 2001, the last time less-than-truckload (LTL) carriers faced a significant downturn in the domestic economy was in early 1991. Although the current slide has caused LTL tonnage and revenues to fall, leaving shippers and investors alike with concerns about the industry's financial well being, today's LTL carriers appear to be a much healthier breed than the LTLs of 10 years ago.

One striking difference is capacity. In recent years, LTL capacity has eroded as a number of carriers—including Preston Trucking, NW Transport, and ANR Advance—left the marketplace. Additionally, LTLs today build more of their capacity "on a variable basis," says Michael W. Wickham, chairman and CEO of Roadway Express, who spoke at a recent conference on global transport and logistics sponsored by investment firm Bear Stearns. Roadway leases equipment, such as trailers, instead of making purchases. This allows the carrier to adjust equipment levels with demand, so "there's not as much excess capacity in the system," Wickham said. "When business goes down, we don't have the assets to protect."

Another big difference between today's LTLs and their counterparts of a decade ago is their ability to control costs. In general, the major "LTLs have done a good job at managing costs," says Ed Wolfe, a senior transport, logistics, and supply chain analyst at Bear Stearns. This includes labor costs among all carriers, even the unionized LTLs.

ABF Freight System, for example, matches labor costs to daily shipment levels, a practice that "has proved especially beneficial during this ongoing period of declining tonnage," said Robert Young III, president and chief executive officer of Arkansas Best, parent of ABF, in announcing his company's first-quarter results. "Because over 60 percent of ABF's expenses are associated with labor, it is critical to diligently manage these costs, both in good times and in bad."

Other cost-cutting strategies are in use at the various LTLs' headquarters. Pat Blake, chief executive officer of Consolidated Freightways, reports that in January CF began a program to achieve "permanent cost reductions throughout operations. "We are on track to meet or exceed our cost-reduction run rate of $125 million by the end of 2002," Blake says.

Additionally, the LTLs have reduced the number of terminals in their networks over the past decade. Wolfe says that capacity at the terminal level poses a constraint, thereby supporting pricing to some degree.

Tight capacity allowed the LTL carriers to implement rate increases in 1999 and 2000, and that trend should continue in 2001, say analysts and carrier executives.

Both Robert V. Fasso, president, Regional Carrier Group, USFreightways, and Gerald L. Detter, president and chief executive officer of Con-Way Transportation Services, predict a rate hike for the fall. Detter told investors the rate hike would not be as great as those in recent years and that Con-Way would continue to negotiate increases with larger customers. "[Shippers] understand that our costs are going up," says Detter. "We have been successful in negotiating reasonable increases in contracts."

Analysts agree that if Con-Way and USFreightways, two of the largest interregional LTL carriers, can make an increase stick, other LTLs will likely follow suit. "A rate increase is to be expected, given the good pricing discipline experienced over the past five years from the LTL carriers," says a recent report from the investment firm Morgan Stanley Dean Witter. "We believe this explains why the LTL carriers have seen much less volatility in earnings in this slowdown compared to the 1990-1991 recession."

The increase is needed to offset higher operating costs, particularly those associated with diesel fuel. Robert Costello, chief economist with the American Trucking Associations' Economics and Statistics Group, says he does not expect fuel prices to drop anytime in the near term. "There is a long-standing problem with OPEC (the Organization of Petroleum Exporting Countries) that still exists," he says. "But that's only part of the problem. Domestically, we don't have enough refinery capacity. On the East Coast and in the Midwest, refineries are running at full capacity. If one should fail, prices could spike in that region."

Yet getting shippers to go along with a rate hike may not be an easy task. Albert J. Giunchi, corporate director of distribution logistics at Hartz Mountain, says his company has paid a fuel surcharge since March of last year, which has added 2.6 percent to the cost of transportation. Giunchi said he understands the surcharge, but he "absolutely does not expect a rate increase" this year.

Over the past several years, analysts have been impressed with the discipline the major LTL carriers have shown in finding the "profitable freight." Young of Arkansas Best recently said business declines had "not resulted in significant reductions in LTL yields." He attributed the yields to a "policy of carefully reviewing the operating costs of individual accounts in order to make pricing decisions that produced good overall profitability."

Diversification allows carriers more flexibility in choosing the most profitable services. As a result, carriers are offering a variety of transportation and logistics-related options, such as time-definite transportation, freight forwarding, consulting, and cross-border service into Canada and Mexico. The differences between longhaul and regional carriers have blurred in this environment. Recently, the regional carriers have moved into the inter-regional and expedited longhaul sectors, while the longhaul carriers have increased their share of regional shipments.

"Our regional business is growing faster than our core longhaul business, and specialty services are growing even faster," says Wickham. He expects the growth rate of regional services to outpace Roadway's overall growth rate by 50 percent over the next five years.

Yellow Freight System, traditionally a longhaul carrier, has seen its regional business grow to about 55 percent of the carrier's total shipments. "Everyone is getting into everyone else's market," says James Welch, president of Yellow Freight System. "We have focused a lot on regional markets. We won't abandon [the longhaul LTL business], but we will re-engineer our network."

LTL carriers need such flexibility not only to achieve better profitability but because "customers demand a broader menu of services" from one provider, says Fasso. Citing customer trends, Fasso says the growth for LTLs is in the shorter-length hauls, the 700-mile range.

Customer demand will continue to put pressure on carriers, making consolidation among the LTLs a possibility, says Wolfe. One recent transaction, FedEx's acquisition of American Freightways, bodes well for the buyer, the analyst says. "FedEx will integrate American Freightways into a nationwide system with Viking Freight," Wolfe notes. "If you look at the regions the two carriers cover, there is no overlap; they complement each other perfectly. Viking has the 13 Western states and American Freightways covers everything else."

Although the move by FedEx could trigger other mergers or acquisitions, no deals are imminent, says Wolfe. "The top four LTL carriers control 33 or 34 percent of the total market, and they have been able to maintain their rates and profitability," he says. "Compare that with the top 10 truckload carriers, which own less than 15 percent of the market."